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Bond Valuation
You have two bonds in your portfolio. Each bond has a face value of $1000 and pays an 8 percent annual coupon. Bond X matures in 1 year, and Bond Y matures in 15 years.
If the going interest rate is 4 percent, 9 percent, and 14 percent, what will the value of each bond be? Assume Bond X only has one more interest payment to be made at maturity. Assume there are 15 more payments to be made on Bond Y.
The longer-term bond’s price varies more than the shorter-term bond‘s price when interest rates change. Explain why.
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After-Tax Cost of Debt
The XYZ Inc.’s currently outstanding bonds have a 10 percent yield to maturity and an 8 percent coupon. It can issue new bonds at par that would provide a similar yield to maturity. If its marginal tax rate is 40 percent, what is XYZ’s after-tax cost of debt?
What Is the Cost of Debt?
The cost of debt is the effective interest rate that a company pays on its debts, such as bonds and loans. The cost of debt can refer to the before-tax cost of debt, which is the company’s cost of debt before taking taxes into account, or the after-tax cost of debt. The key difference in the cost of debt before and after taxes lies in the fact that interest expenses are tax-deductible.
Impact of Taxes on Cost of Debt
Since interest paid on debts is often treated favorably by tax codes, the tax deductions due to outstanding debts can lower the effective cost of debt paid by a borrower. The after-tax cost of debt is the interest paid on debt less any income tax savings due to deductible interest expenses. To calculate the after-tax cost of debt, subtract a company’s effective tax rate from 1, and multiply the difference by its cost of debt. The company’s marginal tax rate is not used; rather, the company’s state and federal tax rates are added together to ascertain its effective tax rate.
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Yield to Maturity
XYZ Inc. bonds have 5 years left to maturity. Interest is paid annually, and the bonds have a $1,000 par value and a coupon rate of 8 percent.
What is the yield to maturity at a current market price of (1) $800 and (2) $1,200?
If a “fair” market interest rate for such bonds was 12 percent—that is, is rd=12%—would you pay $800 for each bond? Why or why not?
YTM – otherwise referred to as redemption or book yield – is the speculative rate of return or interest rate of a fixed-rate security, such as a bond. The YTM is based on the belief or understanding that an investor purchases the security at the current market price and holds it until the security has matured (reached its full value), and that all interest and coupon payments are made in a timely fashion.
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Present Value of an Annuity
Find the present values of the following ordinary annuities if discounting occurs once a year:
$300 per year for 10 years at 10 percent.
$150 per year for 5 years at 5 percent.
$350 per year for 5 years at 0 percent.
Annuities are contracts issued and distributed (or sold) by financial institutions where the funds are invested with the goal of paying out a fixed income stream later on. They are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
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Yield to Call
Five years ago, XYZ Inc. issued 20-year bonds with a 12 percent annual coupon rate at their $1,000 par value. The bonds had 5 years of call protection and an 8 percent call premium. Yesterday, XYZ Inc. called the bonds.
For this problem, imagine that the investor who purchased the bonds when they were issued held them until they were called. Considering this, compute the realized rate of return. Should the investor be happy with XYZ Inc. calling the bonds? Why or why not?
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Estimating Returns and Deciding on Refinancing
Overview Complete a 2–4-page, two-part assessment addressing two different hypothetical scenarios. In Part 1, apply a probability analysis in estimating returns for a company. In Part 2, recommend whether or not to refinance a home.By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 1: Maximize shareholder wealth.o Estimate the expected return for a company.o Formulate the standard deviation for a company.o Assess how the standard deviation clarifies expectations in terms of a return.• Competency 3: Evaluate capital expenditure investment projects.o Describe the decision-making process for refinancing.o Explain qualitative considerations in the decision-making process.o Devise examples of calculations.
Estimating Returns and Deciding on Refinancing
Resources
The following optional resources are provided to support you in completing the assessment or to provide a helpful context.
o Chapter 9: Mortgages and Mortgage-Backed Securities.• Gibson, R., Michayluk, D., & Van de Venter, G. (2013). Financial risk tolerance: An analysis of unexplored factors. Financial Services Review, 22(1), 23–50.
• Mansur, I., Odusami, B., & Nasseh, A. (2011). The relationship between money market mutual fund maturity and interest rates. Journal of Financial Service Professionals, 65(4), 58–66.
• Woodford, M. (2010). Financial intermediation and macroeconomic analysis. Journal of Economic Perspectives, 24(4), 21–44.
• Downes, J., & Goodman, J. E. (2014). Dictionary of finance and investment terms (9th ed.).Hauppague, NY: Barron’s.
• Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage.
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Estimating Returns and Deciding on Refinancing
Assessment Instructions
This assessment consists of two parts, each of which includes a hypothetical situation for you to respond to.
Part 1. Estimating Returns
Imagine the following scenario:
A company is faced with a 20 percent chance of a poor economy, a 40 percent chance of an average economy, and a 40 percent chance of an above-average economy. The company would expect only a 10 percent return in a poor economy, an 18 percent return in an average economy, and a 30 percent return in an above-average economy. Use the hypothetical situation above to answer these questions to demonstrate the use of probability analysis in estimating returns:
• What would the expected return be for this company?• What would the standard deviation be for this company?• How does the standard deviation help you better understand what to expect in terms of a return?
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Part 2. Deciding on Refinancing
Use at least two resources to support your ideas.
Changing interest rates create opportunities for home owners to gain advantage by refinancing their homes. For this part of the assessment, use the following scenario to consider this issue.Imagine you have a $100,000 mortgage. Your current loan is at 7 percent with 14 years left, negotiated one year ago and involving $2,000 in closing costs. You are considering refinancing at 5.5 percent for 15 years. The closing costs would be $1,500.
Complete a 1–2 page evaluation of the refinancing possibility.
• Would you decide to refinance? Why or why not?• What qualitative considerations would you consider in your decision to refinance or not refinance?Provide examples of calculations you would use to help you make your decision. In addition, use at least two resources to support your ideas.
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Additional Requirements
• Length: Your analyses should total 2–4 double-spaced pages. In addition, include a title page and references page.• Written communication: Written communication should be free of errors that detract from the overall message.• Style and Formatting: Apply APA style and formatting.• Resources: You must use at least two references for each part of the assessment (totaling at least four references).• Font and font size: Times New Roman, 12 point.
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Benefits of Budgeting
A budget is prepared for control and planning purposes. Use of budgets allows for identification and setting of business goals and objectives. Forecasted values provide for profit analysis as well as performance evaluation and cash allocation. Master budget incorporates a set of operating, cash, program, and financial budgets for a specific accounting period (Collin 2011). A master budget incorporates all of the forecasted estimates in the financial and operating segments of the business.
At each production stage, a manufacturer creates a budget to assist in tracking of costs associated with the production of a product. Manufacturers use either a standard budget or an actual budget. A standard budget is prepared for the whole accounting period while an actual budget is prepared monthly (Dennis 2010). The budget allows a manufacturer to analyze costs and set prices for future as well as set prices for the products.
Benefits of Budgeting
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A manufacturer’s budget includes a set of three budgets that forecast cost of direct materials, direct labor, and overheads for the units to be produced during the production process. Through the budget, manufacturers can estimate the total cost used in production products listed in the production budget. Direct materials budget contains the cost of raw materials, direct labor budget consists of total labor hours used for the production of some units while overhead budget provides for the variable and fixed costs (Dennis 2010).
Budgeted income statement and balance sheet are the financial budgets included in the set of budgets to estimate profits. After preparation for budget used in production and cost estimation, a budgeted income statement shows the total profits to be realized from selling the finished products. The statement helps management to know whether the products will produce good returns. A pro forma is used to calculate financial results to emphasize current and estimated values (Tanner 2015).
References
Collin Barrow (2011). Practical financial management. Retrieved from https://books.google.com/books?isbn=0749462671
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Masters of Quantitative Finance Application Essay
Quantitative-finance is the methodology of applying disciplines from mathematics, statistics, scientific computing, and finance with computer programming to financial trading and investment work. Quantitative-finance is the use of mathematical models and extremely large datasets to analyze financial markets and securities. Common examples include (1) the pricing of derivative securities such as options, and (2) risk management, especially as it relates to portfolio management applications. Professionals who work in this field are often referred to as “Quants.”
INSTRUCTIONS:
All applicants applying for the Masters of Quantitative Finance Program are REQUIRED to write a personal essay which should cover the following topics:
Why are you interested in quantitative finance?
How is your background appropriate for quantitative-finance?
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Contingent Exclusionary Rule
In real world, Donald Dripps model would work as a constitutional remedy that integrates exclusionary regulation with financial damages conventionally related to tort allegations. Courts should begin to test suppression orders contingent based on police failure to pay for damages as determined by courts (Dripps, 2001).
In addition, compulsory use of the contingent exclusionary rule can be used to not only prevent but also punish deliberate breach of constitutional restrictions. However, a number of seizure and search breaches fail to meet deliberate violations, may be due to police obliviousness or unusual instances, as such contingent exclusionary rule applies to many criminal cases.
To some extent, the Contingent Suppression is compatible with restorative justice. To start with, it acts for the best interest of the judicial system since truth is well fostered. This due to the fact that police and judges would not hide evidence to get a criminal sentence when there is practical Fourth Amendment breach that can result in a suppression order, particularly, exclusionary rule in certain conditions fail to cost convictions the Fourth Amendment never forbid. The cost is simply decreased or even eliminated (Dripps, 2001).
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Moreover, the tort remedy protects the innocent as well the guilty from unconstitutional seizure and searches. This means tort remedy serves as a deterrent from illegal search and seizure. Both local and state administrations are liable to Forth Amendment breaches, can demand while enforcing training programs for law enforcement bodies in their jurisdiction. The constitutional remedy is important in encouraging ethical police officers and judicial process to be effective.
On the other hand, the courts may set damages and thus eliminate legal aspects from politics, especially; contingent exclusionary rule addresses political issues since the federal courts would set damages. By and large, using exclusionary rule as legal remedy will be mooted in way that protects the Constitution for Fourth Amendment breaches following the growing need to ban exclusionary rule.
